3 PROBLEMS SETS in microeconomics

1. A new plan before
Congress to combat obesity has recommended instituting a national tax on fast
food. The demand for such food is
thought to be elastic (but not perfectly elastic).

a. Show the market
for fast food before any such tax is put in place. Identify the producer and consumer surpluses
as well as the equilibrium price and quantity (you do not need to calculate
these, just show them in your graph).

b. Show a new graph
indicating how this tax would change the market. Identify which curve shifts, what happens to
the price the buyer pays and the price the seller receives. Additionally, what happens to consumer and
producer surpluses, do they go up, down, or stay the same? (see below)

c. Who would bear the
larger portion of the burden of the tax?
Why?

d. If the original
market price prior to the tax was $2 and the quantity was 500 and after the tax
the price the buyer pays is $2.50, the price the seller receives is $1.50, and
the quantity is 400, what is the size of the dead weight loss?

2. Pollution is
considered by most a negative externality.
Some economists would like to see the costs of these burdens
incorporated into the price of goods that we buy. For instance, since coal fire power plants increase
emissions that could potentially lead to climate change, these economists
believe that the price we pay for electricity is not adequately high
enough. Draw a completely labeled graph
and illustrate on the graph how much higher electricity prices would be if the
full costs of electricity production were taken into account. You do not need to provide actual numbers,
rather show on the price axis where the price would be before the externality
is considered and the price after the externality is included. What problems might exist in determining this
new, externality based, price?

3. Data for the
market for graham crackers is shown below.
Calculate the elasticity of demand between the following prices.

Price of crackers

Quantity Demanded (per month)

Quantity Supplied (per month)

$3

80

120

$2.5

120

140

$2

160

160

$1.5

200

180

$1

240

200

$1.00 - $1.50: ___________________________________

$1.50 - $2.00: ___________________________________

$2.00 - $2.50: ___________________________________

$2.50 - $3.00: ___________________________________

If the price of graham crackers is $2.50 should firms raise
or lower their prices if they want to increase revenue? Explain this in terms of elasticity.

4. The following
table presents data for wages in the market for internet security
professionals.

Wage

Quantity Demanded

Quantity Supplied

$50,000

20,000

14,000

$60,000

18,000

18,000

$70,000

16,000

22,000

$80,000

14,000

26,000

$90,000

12,000

30,000

What is the equilibrium wage?
___________________________________

Due to an increase in the internet security threats, the government
wants to apply a price control in this market to encourage more people to
become internet security professionals.
Assume that a wage control is set at $75,000. Will this increase the number of people
entering this labor market? Why or why
not? If you answered no, at what wage
would you set the price control? What is
the consequence of doing this?

5. In the old days
lighthouses were built along the coast to prevent ships from running aground on
rocks in unfamiliar ports. By shining a
beam of light over a port and guiding ships away from rocks, these vital
buildings reduced the risk for ship captains and were generally considered to
be extremely valuable resources.
Curiously, lighthouses were almost always run and maintained by local
governments.

Based on what you have learned this week explain in economic
terms why private firms would not run a lighthouse?

NAME: _________________________________________________ PROBLEM SET 3

1. What is
diminishing marginal productivity? Why
does it exist? Provide a real world
example of this and a live link to an internet source. (In other words, don’t use an example from the
text, find an example of your own.)

2. Complete the
following table. What output is the
profit maximizing level of output. Using
proper economic terminology why is this the case?

Output

Price

Total Revenue

MR

TVC

AVC

TFC

AFC

TotalCost

ATC

MC

0

10

0

$0

$100

1

10

10

$100

160

2

10

20

100

$100

3

10

30

125

$100

4

10

40

140

$100

5

10

50

250

6

10

60

170

$100

7

10

70

200

$100

8

10

80

340

MR = Marginal Revenue

TVC = Total Variable Cost

AVC = Average Variable Cost

TFC = Total Fixed Cost

AFC = Average Fixed Cost

ATC = Average Total Cost

MC = Marginal Cost

3. A local hardware
store is trying to decide whether to stay open.
They have found that their industry is extremely competitive and profits
have shrunk considerably. Knowing that
you have taken an economics course the owners have asked for your opinion. Draw a completely labeled graph to help you
explain the shut down decision. Assume
that the store is losing money; however, explain why they may want to stay open
for a little while longer. (NOTE: Your
answer should be a written explanation of your graph.)

4. Monopolies can
sometimes find themselves in difficult financial situations that lead to
losses. Suppose Mr. Burns’ power company
has a monopoly for providing electricity in Springfield. His costs of upkeep are so high that he is
persistently losing money. Show this
outcome in a completely labeled graph.
Clearly identify all parts of your graph including the best price and
output for the firm as well as the losses.

Now, answer the following:

What happens to the market when Mr. Burns raises
the price he charges?

Will this stop his losses? Why or why not?

5. Movies are
distributed in a variety of forms, not just first run theatrical
presentations. What other ways are
movies distributed? (HINT: Distribution
has nothing to do with how old a movie patron is.) What are the different price points? Using this information, draw a fully labeled
graph of the market for movies in which the distributor of the film price
discriminates. (NOTE: This should not be perfect price
discrimination.)

NAME :
_________________________________ PROBLEM
SET 4

1. What combination
of the two goods below allows you to maximize your utility with a budget
constraint of $14? Show how you arrived
at your conclusion in the space provided below.
Place your final answers on the lines at the bottom of this page.

PRICE = $0.50 per pint

Pints of Butter Beer

Total Utility (Utils)

1

15

2

23

3

30

4

35

5

38

6

40.5

PRICE = $2.00 per box

Boxes of Bertie Botts Every-flavor Beans

Total Utility (Utils)

1

10

2

22

3

36

4

52

5

70

6

90

Pints of Butter Beer: _________________________

Boxes of Beans: ____________________________

2. Assume the following
game is played one time only. Based on
the information in the payoff matrix, PNC Bank and Citizens Bank are
considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in
terms of profits in thousands of dollars:

Citizens Bank

Collude: Raise
Rates

Defect: Keep Rates
where they are

PNC

Collude: Raise
Rates

(900, 600)

(700, 800)

Defect: Keep Rates
where they are

(1100, 300)

(800,400)

a. Does PNC have a
dominant strategy? What is it? Does Citizens have a dominant strategy? What is it?

b. Solve for the Nash
equilibrium.

c. Does the result of
your answer change if the game is played an infinite number of times? Why or why not. Properly use game theoretic terminology in
your answer.

3. Suppose that the national four-firm
concentration ratio in NAICS code 7131102 is 71.8. What is NAICS code 7131102,
and should authorities be concerned about the exercise of monopoly power based
on that 71.8 figure? Explain your answer.
(You will need to find the NAICS title for industry code 7131102 to
answer this question. Yes, you can find
it on the internet.)

4. Illustrate in a fully labeled graph the market for
information security specialists. Show
the market equilibrium wage and quantity (you may just note this in your graph
with a “w” and “q” or you may make up a price and amount). Due to a recent increase in the number of
cyber attacks from unfriendly nations firms and the U.S. government are trying
to hire more people to help protect their information. Assuming it takes a few years to adequately
train someone to protect this information, what would you expect to see happen
to price and quantity in this market? Show
this change in your graph.